I really don’t think you can look at the economy of the United States with out considering the entire global econoly. I agree with one poster above about concentrating on increased revenue but not through taxes. Stimulating the economies of lesser developed nations and standing ready to supply them with goods services and technology might get us through a few more decades. Taking a realistic inventory of not only our present abilities to produce but our potential as well. Creating new markets is something generaly ignored. Look at the Dot Com Boom. We need some creative plausible solutions based on what we know about the dynamics of human nature.
I’m fairly certain other people have already thought of making more money as an economic fix.
This is actually a fairly intriguing idea – that we invest in other places, so that they buy from us. However, there’s one major problem here, and that’s that we’re horribly outclassed in our exports. East Asia, East Europe, West Europe, et al. all have much more industry than we do, and our industry has been sort of stagnating.
How is raising taxes by 39 percent is any less “virtually impossible and disastrous” than cutting spending by the same amount? I would argue that an across-the-board tax increase would be significantly less disastrous than an across-the-board spending decrease because the former would more affect those of us who can most afford it (like me) and the latter would more affect those of us who can least afford it.
(I don’t believe for a minute that either scenario is at all likely, but the topic is worthy of discussion.)
Also, as I believe others have pointed out, neither option would decrease the national debt in any way. They’d merely stop the way we’re currently increasing it.
Not in California, or at least not very much. (There is a very small increase allowed.) Of course that hasn’t done very well in making state tax revenue stable. Or the tax burden equitable.
The US has the second highest amount of export of any country. Were you saying something different?
A comment that well and truly misses the entire point of what I wrote.
No, I got your point, and I agree with it. But first, your assumption that we pay more property tax with increasing value is not always right, and second, your point that we need to pay more in step with the increasing value of our income and possessions is right. Because when we don’t various bad things happen.
It’s also a very, very large country, with far less of a focus on industry than many other western countries, and certainly less than, say, China.
Look at military spending back in 2001 and look at military spending today. Compare medicare and social security spending. Back out spending for things like unemployment, food stamps and other entitlements that spring from the recession. back out the difference in interest expenses. Now add in the revenue we would get if the Bush tax cuts get repealed (the whole thing not just the stuff for the rich guys).
We are running a surplus again. Its not rocket surgery. Of all these things the medicare costs are the biggest problem.
It would not be easy to cut spending that much, but it wouldn’t crater the economy. The U.S. economy is about 15 trillion dollars, so you’re talking about a cut equivalent to somewhere between 7-10% of economic output. But that doesn’t mean the economy would contract by that much, because those cuts would free up capital and other resources that would be put to use elsewhere to some degree.
I’m guessing you’d see modest deflation, an unemployment rate spike to maybe 10-12%, and a lot of wailing and gnashing of teeth. Then the economy would re-adjust over time and recover, and probably be healthier than it otherwise would have been.
The economy is pretty resilient to fiscal shocks. Government spending was cut almost in half in the year after WWII, and millions of people employed by the federal government were laid off, and the country did fine. On the other side of the coin, the 800 billion dollar stimulus was spent in two years, and you can hardly notice the effect in the statistics.
Another data point: The terrorist attacks of 9/11 are said to have caused roughly a trillion dollars in economic damage, after you consider not just the property losses, but the sharp reduction in airline travel and all the economic dislocations caused by increased security and other factors. New York City alone laid off over 3,000 workers in the week after the attacks. That’s a fiscal shock on the same order as what we’re talking about, and the evidence shows that the economy did get hurt by it, but nowhere near the point of causing an economic collapse.
Of course, it’s completely politically unfeasible to do this, which is why even that crazy right-wing ideologue Paul Ryan’s budget doesn’t actually balance the budget for a couple of decades.
But if we managed that, and assuming that the economy continues to grow, it becomes a decreasing percentage of GDP, and so less and less of a problem.
Tax policy would remain unchanged. Where is this additional capital and resources coming from?
You seem to implicitly acknowledge that there would be very substantial layoffs if such budget cuts did occur – by my rough ballpark estimate, somewhere around a million direct job losses, and many more indirect. That would probably depress wages, I would think. Are these additional resources that you claim would be “freed up” actually wage cuts?
Does everyone get to make up their own numbers for this debate, and freely disregard the difference between direct and indirect effects? Because economists at USC have surveyed the literature and found that most studies conclude that the economic impact of the 9/11 attacks were most likely less than 1% of GDP, or somewhere in the neighborhood of $100 billion dollars in direct costs. Indirect costs are of course much, much higher: I’d guesstimate several trillion dollars, considering that 9/11 directly lead to the wars overseas, the Department of Homeland Security, and all the downstream effects.
If you want to cut the Federal government by $1.2 trillion in spending, you should be comparing the spending cuts to the economic impacts if the 10 or 15 largest cities in the US each had a 9/11 attack in the same year. The indirect costs would of course be hugely greater, as I’m sure you’d acknowledge, because direct and indirect costs are not the same thing and cannot be compared.
Again, the direct economic cost doesn’t even begin to calculate the stupidity of having to close prisons and let criminals loose (you can’t just take a third out of the Bureau of Prisons budget and expect nothing to happen), stop health care services for a third of veterans and senior citizens, stop vital Army Corps of Engineers programs that are trying to prevent future Katrinas, and so on.
Ah, you might say, but private businesses would pick up the slack and create new places for citizens to imprison criminals without government interventions, that churches would suddenly start caring for hundreds of thousands of veterans because people would spontaneously start donating vast sums for their care, and that flood control projects are best left to the devices of those who live in flood plains. If one were to say that, well, I think they’d be laughed out of the Internet.
Just let the Fed buy up the debt. Then everybody wins.
Given that there is a lot of capital now that is unproductive, what exactly would be done with this new capital? Especially considering the depressed demand from the unemployment rate you expect, which might be an underestimate, but is bad enough.
That didn’t happen automatically. Truman was very concerned about the impact, remembering the decline in the economy after WW I. However, after WW II there was substantial repressed demand, since major consumer goods and things like cars were unavailable during the war. Many people had substantial savings from war bonds and the large number of men who lived off the government (lucky them. 
) We don’t have suppressed demand today, and we don’t have substantial savings reserves.
If you lay people off, they become available for other jobs. Stop building things, and the price of the raw materials you would have consumed goes down. Stop borrowing a trillion dollars each year, and it takes pressure off the capital markets.
I’m not saying these effects would completely offset the cuts - far from it, which is why I said unemployment would probably shoot up to 10-12% and there would be deflation (and almost certainly a double-dip recession that could be quite bad). But the point is that the government isn’t just burning paper - it’s consuming real resources that would not go unused in the private economy if they were freed up. At least not all.
Wage cuts would be the obvious market response to a sudden glut of labor, except that wages aren’t like other things. They’re sticky. And they are made stickier by minimum wage laws and other workplace protections that make it hard for employers to cut wages. So I think there would be a significant amount of unemployment resulting from those layoffs. However, some people who would be laid off would find work in the private economy simply because their skills are in demand. NASA scientists and astronauts have been snapped up by private space companies. A good percentage of government accountants, lawyers, scientists, and engineers could probably find work. Even in an economy with high unemployment there are jobs going unfilled for lack of available talent.
For the purposes of looking at the effect of an economic shock, the direct and indirect effects are irrelevant. What matters is the total wealth removed from the economy.
That’s silly. For one thing, terrorist attacks are random and/from an economic standpoint, unplanned. Second, they have terrible effects on the public mood and investment. Cutting government spending might actually boost public confidence because they would see something being done about the upcoming fiscal trainwreck.
You remind me of city politicians who plan extravagant trips for themselves and spend all kinds of money on foolishness, and then respond to any demand for a budget cut by threatening to lay off all the police and firemen. Oldest trick in the political book.
In fact, the 1.2 trillion would not have to be handled as an across-the-board 30% cut. You could instead look at cuts to the heaviest hitters in the budget first, and some departments could be cut far more drastically or even eliminated.
But like I said before, I don’t advocate this - the main point I was making was that such cuts, while painful, would not cause the total collapse of the economy. I think you agree with me on that.
Additionally, there was a fairly unique situation with regards to workers – specifically that the supply of workers was so incredibly low (due to losing so many people to the war) that supply-side economics actually could work.
This doesn’t make sense. It isn’t like the government is tempting investors with high interest rates for government debt – the interest rate is very low now. If capital is being “diverted” to government bonds, it’s because that’s where investors want their money, not because they’re having their arms twisted.
But it seems you didn’t even read the defense industry paper on what a 10% immediate cut in defense spending scheduled for January would mean. They estimated perhaps 1,000,000 job losses in the defense industry (not government jobs). Ok, they’re trying to scare us, maybe it is some fraction of that. But the idea that NASA engineers are going to go find jobs in industry just isn’t plausible in the slightest.
Take SpaceX, for example: they have a NASA contract that is a good chunk of revenue for them, they’re trying to compete for defense space missions, and they have a decent number of commercial launches scheduled for the next few years. Well, the NASA contract would probably have to be cancelled or severely curtailed. Chances at defense business would not happen. So the commercial business would be stable, right? Uh oh. They launch from Vandenberg and Cape Canaveral, both government-run facilities. There’s no doubt that those bases would be affected, not to mention “free” government services like deconflicting launches, tracking orbital debris, and so on. SpaceX would be in serious trouble, not looking to hire.
Again, look at the USC study: 9/11 removed somewhat less than 1% from GDP. Eliminating $1.2 trillion in government spending, by YOUR numbers, would be “7-10%” of GDP. This would be much, much worse than 9-11, clearly. We’re talking about what happened in 1929.
This is nothing more than the same Tea Party nonsense from last year about how failing to raise the debt limit would be good for the economy and the country.
First, re-read the OP. Second, you cut government by large amounts, and you cut jobs, services, and benefits. It’s a zero sum game: you can’t do even 85% of what government does today on 65% of the budget.
No, I don’t. I’m not sure what gave you that idea. “Total collapse of the economy” is a rather imprecise phrase, meaning anything from depression to the end of the civilized world, but there’s no doubt in my mind that hacking off a third of the government in one year would cause a depression. It’s just obvious.
Have you missed the last 5 years? There are no other jobs – demand is depressed, and companies are sitting on mounds of cash. There is no pressure on the US capital markets – the bond markets are telling the US government to hold its money, and they’re happy to lose money to inflation for the next 10-15 years. “Here, we’ll lend you money at negative real rates for 10 years. No, please, take it, we like to lose money to inflation.” That’s what the capital markets are saying. Is there any amount of real-world evidence that austerity doesn’t work (Spain? Italy? Ireland?) in a liquidity trap that will convince you?
Gah!
Anyway, I note that Ravenman has a pretty comprehensive answer, so I’ll stop my ranting, spittle-speckled response here. It’s just so frustrating to see intelligent posters like yourself continue to spout the same things that really have been disproven in the US, in Europe, in Japan, everywhere.
Thanks for bringing up employment. We didn’t lose that many people. What actually happened was that the positions of men in the workforce had been taken up by women during the war. After the war in many cases the women got booted from the jobs to make room for returning servicemen, in others the women left the workforce to have children. This was possible because wages and the cost of living were such so that it was very possible to support a family on one income. None of this is the case today.
ETA: BTW, in Russia, where the losses were that great, there was an influx of women in the workforce, far beyond that of the US at the time.